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As physicians, we’ve worked really hard to get where we are and to earn what we earn. In today’s litigious world, it’s not surprising how many threads in our communities worry about lawsuits that could take away our families’ financial security, often related to circumstances beyond our control. Accordingly, we often have physicians ask about asset protection.
There are also many companies that specialize in this space - it is their job to worry about the worst-case scenario. That said, it’s important to remember that while the overhanging threat of a major lawsuit that hands down a settlement that surpasses the limits on your insurance policies is always a possibility, it is in fact very unlikely.
That doesn’t mean you shouldn’t protect yourself; it just means you have to create a rational approach that reflects your risks. You should understand that a comprehensive asset protection plan will make your finances and legal structures more complicated, and alongside that, expensive.
Anderson Advisors: For those interested in implementing asset protection tools, Anderson offers a comprehensive suite of services, including planning, registered agent, and entity formation. Our affiliate link at http://aba.link/psg will get you a free strategy session to discuss these issues and explore what's right for you, as well as give you access to packages at a discounted rate.
The Basic Approach to Asset Protection
A basic approach to asset protection:
Make sure you have adequate malpractice, auto, home, and umbrella insurance.
Put money into ERISA protected assets such as retirement accounts that are not subject to lawsuits.
Determine what your actual risk is. If you have rental properties or a business, etc., then your need for asset protection might go up, so doing things like putting properties in LLCs makes sense.
If somebody really wants to sue you, they will find a way. The shields make it harder and more annoying for someone to pursue a lawsuit, but not impossible. Ultimately you should do what allows you to sleep at night. More details on all of this below. Keep in mind that state laws about asset protection vary quite a bit, so it’s important to speak with someone familiar with the laws of your state.
Insure Your Future
High-income earners, especially doctors, need a LOT of insurance. Many physicians assume things won’t happen to them, and put off getting adequate insurance.
The fact is, your income is your greatest asset and wealth building tool. If you get in a car accident and can’t work, you need to protect everything you’ve worked so hard to build. Death happens. Divorce happens. Lawsuits happen. You don’t want to be dependent on other people in these scenarios, so get insurance in place to protect your assets as much as possible.
While everyone thinks of homeowners insurance and health insurance, there are several other types of insurance you should make sure you have in place with proper coverage limits. The following insurances, in particular, are keys to your asset protection plan.
Insurance is your first line of defense against a lawsuit. 34% of physicians are sued during their careers. 50% of physicians 55+ have been hit with a lawsuit, with OB-GYNs and surgeons having the highest risks.1 We cannot stress the importance of malpractice insurance enough. Know the parameters and limits of malpractice verdicts in your particular state, as well as the statute of limitations, and insure appropriately. More on malpractice insurance here.
Malpractice and Tail Insurance Resource: Jason Shah (Jason.Shah@aleragroup.com) is a physician who started a malpractice company that is now under the umbrella of Alera Group. He's great and has helped many members of the group. We do have a referral relationship so please let him know you are coming from PSG if you reach out.
This is the cheapest asset protection measure you can take. Umbrella insurance wraps around your personal home and auto insurance to cover amounts that exceed the policy limits on those policies and is relatively very cheap (starts at a few hundred dollars a year even for a one million dollar policy). Every high income professional likely needs a seven-figure umbrella policy once capping out their coverage limits on their home and auto policies, usually ranging between 1-5 million. Umbrella insurance can help protect you if your teenager gets in a car accident with significant injuries to the other party, or if someone slips on a patch of ice in your driveway and sues you. Importantly, umbrella insurance does not wrap around your malpractice policy.
While disability insurance doesn’t protect your assets directly, imagine something were to happen to preclude you from being able to practice at this stage - injury, freak accident, long term illness, pregnancy complication - what’s your backup plan for income? Without income and with debt, your assets can be exposed to potential creditors if you find yourself in a position where you can’t meet your minimum payments. Learn more here or speak to one of our partners below to get started.
Pattern: http://www.patternlife.com/partner/psg. This convenient option will allow you to enter your information and immediately begin generating quotes from the major disability companies, as well as schedule a meeting with the Pattern team to discuss the options and figure out which plan is best for you. Many in the group have had a great experience with this process.
Physician Financial Services: Lawrence Keller and his team are wonderful, and have a lot of experience in this space. They will run quotes across the major disability companies and guide you through the process. Contact them here.
PolicyGenius: This is not a physician specific company, but well known in the insurance space. They may be a helpful resource if you are looking for another place for quotes. Make sure that you're comparing apples to apples in terms of true own occupation insurance, as not all fields emphasize the need for this equally. Contact them here.
Life insurance also isn’t usually considered when you think of asset protection, but if you are still early in your wealth generation, life insurance that covers at minimum the amount of debt you have can help protect your surviving spouse and/or children from having to sell the house they can no longer afford without your income. Life insurance can also help protect your family from the weight of your student loan debt. Learn more here or speak to one of our partners below to get started.
PolicyGenius: PG is well known in the insurance space, and are a very convenient way to shop for life insurance as they will run rates across the major companies online within minutes, and then get on the phone with you to discuss your options. Contact them here.
Pattern: This option will allow you to enter your information and immediately begin generating quotes, as well as schedule a meeting with the great team at Pattern to discuss the options and figure out which plan is best for you. Contact them here.
Keep It Low Key
One of the easiest ways to protect your wealth is for people not to know you have it. You are far less likely to get sued if people don’t know they can make a large payoff out of you.
Sometimes, this is inevitable. In malpractice cases, for example, the plaintiff is going to know you’re a physician, and likely will have guidance from their attorneys about what you make and how many assets you’re likely to have.
But there are other, simple ways to protect yourself and your assets. For example, letting people know you have umbrella insurance is a great way to tell them immediately you are a millionaire. So be careful who you share that type of information with. Protecting your personal information, such as home address, through other avenues such as LLCs and trusts (discussed below) can help protect you from people looking up your home’s value and guessing your net worth. Be careful about what you post on social media, because they can use all of that information to extrapolate what your assets are as well.
A more modest The Millionaire Next Door lifestyle can also help when it comes to personal lawsuits. Someone is less likely to start moaning about back pain in a car accident with a Honda than with a Maserati. This isn’t to say we want you to skimp and live like a resident forever. You’ve worked hard for your success and your wealth. Just be mindful of how more flashy purchases such as nice cars, large homes, etc. can expose you to litigious people and ensure those assets are protected as much as possible.
Asset Structure and Ownership
One way to help protect the assets you already own or plan to purchase, such as real estate and vehicles, is to pay attention to how you set ownership up. In many states, joint tenancy on titles can help protect your assets by making them 100% owned between both you and your spouse. Setting your assets up under this ownership structure can also be useful for estate planning as it can help avoid probate.
Different states have different laws on the requirements for joint tenancy (in some states, for example, it’s automatic) and which assets can be structured under this type of ownership. It’s important to make sure you’ve spoken with a local professional who knows the particular rules and requirements in your state.
ERISA Protected Accounts
Retirement accounts included in the Employee Retirement Income Security Act (ERISA) are generally protected from seizure by creditors, making them a great tool in your asset protection toolbox. Protection under ERISA can vary slightly from state to state when it comes to assets protected from a lawsuit, so make sure you are working with a local attorney or financial planner to understand the specifics of where you live.
In general, the following retirement accounts qualify for asset protection under ERISA:
Some 403(b) plans
IRAs, for example, are one of the areas where assets are sometimes protected from lawsuits, protected up to a certain amount, or not protected, depending on where you live.
LLCs & Companies
Limited liability companies (LLCs) can be a great way to protect assets, especially if you are self employed or own a lot of real estate. Putting business assets and equity into LLCs can be great for protecting them. While a physician business LLC won’t protect you from medical malpractice claims, LLCs and other business structures can be a valuable way of building protection. They can also protect your other assets, such as real estate investing, from personal claims. And they help offer anonymity, which makes it harder for those looking to sue to know who you are and what your assets may be.
LLCs and many other limited liability company structures are state entities, so it’s important to make sure you are working with a local professional when setting up your entity or entities. (If you have a high volume of real estate properties, it can be beneficial to split them into more than one LLC.)
For those interested in implementing asset protection tools, Anderson Advisors offers a comprehensive suite of services, including planning, registered agent, and entity formation. Our affiliate link at http://aba.link/psg will get you a free strategy session to discuss these issues and explore what's right for you, as well as give you access to packages at a discounted rate.
Trusts can carry the same nuances as ERISA protected retirement accounts, because the rules of asset protection within trusts vary from state to state. In some states, self-settled trusts (where you are both the trustee and the beneficiary) provide asset protection benefits. These trusts are called domestic asset protection trusts (DAPTs). In other states, such as Florida, self-settled domestic asset protection trusts do not provide protection. More favorable states include Michigan and Tennessee. It’s important to note that the state(s) in which the assets are located can make a difference. Work with a local professional to understand the rules and protection in your particular state and to balance the cost/benefit analysis compared to other options, such as an LLC.
Domestic asset protection trusts are typically required to be irrevocable trusts (meaning property transferred in cannot be transferred out and the trust cannot be amended). With these limitations, it’s important to understand all the ramifications before transferring assets into this type of trust. For example, having your primary residence in a trust can add additional layers to processions such as selling your house or refinancing your mortgage. Make sure you understand the rules and regulations before transferring assets into the trust’s name.
Be Aligned With Your Spouse
Around 35% of marriages end in divorce.2 Divorces can be not only heartbreaking but very expensive. Attorney fees can range into the tens of thousands of dollars depending on the situation, and a divorce can cost up to 50% of the wealth you’ve generated.
One of the things we talk about in our financial grand rounds is to make sure as you start out in your career (or reach a time of change in your career) that your spouse is on board. This advice goes well throughout your relationship. Being aligned with your spouse is a preemptive way to protect your assets from a costly divorce. And research shows that couples that work together in other avenues, such as wealth building, are more successful that couples working apart or single individuals.3
Prenups and Postnups
If you have significant wealth, you are bringing into a marriage or have a large income gap between you and your significant other, prenups and postnups may factor into your pre-marriage (or post marriage) discussions when considering asset protection and the possibility of divorce. No one heads into a marriage with divorce in mind, but when wealth is significant and/or there is a large gap in income generation, a prenup or postnup may be worth considering to protect yourself if the worst should happen.
While being aligned and onboard with your spouse is great preventative care, a prenup/postnup could be viewed as an insurance policy at the back end of a marriage. Better to have and not need one than to need one and not have it.
Complicated Doesn’t Always Mean Good
There are other options, such as whole life insurance plans, annuities, holding high mortgage balances, etc., that you might consider when looking for ways to shelter your wealth. But the more complicated and costly a situation becomes - such as a whole life insurance policy - the less it may make sense.
These avenues are similar to taxes. You don’t want to spend so much time trying to protect your wealth that you invest in things to keep it safe that cost more than what they protect. This is where a trusted advisor can help you balance and assess the risk versus reward. (For example, a guaranteed loss to an insurance company monthly in your premium payment versus a possible loss of the asset amount protected within the investment if you’re sued.) That isn’t to say that these options might not work for certain people in certain situations. These options, however, are much more nuanced, so it’s important to understand for whom, and when, they work for asset protection.